David Franklin, Managing Partner, (212) 223-1044 Ext. 222
Loan Broker Versus Direct Lender
A direct lender can only offer very specific financing that may or may not be the best available for the borrower’s funding request. By best available, we mean the most capital at the lowest interest rate with the least onerous collateral requirements.
Keep in mind that because we are not a direct lender but rather a clearinghouse for hundreds of different lenders and funding sources, we offer a great advantage to the commercial borrower.
Depending on the geographic location, size of the loan, the credit profile of both the borrowing entity as well as the credit profile of the principal, the industry type, and finally, the type and mix of collateral available (if any), we may be able to offer a variety of financing solutions.
If the borrower can find a direct lender on their own to provide the same transaction that we are offering and without having to pay our fee as a broker, then clearly, they should go for it. However, if the proposal we offer, including our broker fee for arranging the loan, is the best deal on the table, then the course they should pursue is likewise clear.
The first issue is to determine is whether the borrower requires debt or equity. Debt would be a loan and equity an investment. Equity is always more expensive than debt, and yet in certain instances, the client may desire equity simply because there is no debt service to cover or payback required. Therefore, it may provide less pressure for the client, but, again, in the final analysis, he will pay more for equity. As previously discussed, debt comes in 2 forms and 2 forms only: secured or unsecured.
A secured loan is one that has collateral against which the lender will file a UCC-1 lien to perfect a security interest in that collateral. Collateral is typically accounts receivable, inventory, equipment or real estate, or some combination thereof. Some lenders can lend on intangible assets such as patents, trademarks, proprietary technology, etc., provided that the lender is satisfied prior to making the loan that the collateral is marketable in the event of default.
An unsecured loan can be made in small amounts (from $10,000 to $100,000) based on the good personal credit of the principal or in larger amounts (generally starting at $500,000) based on the ability to cover the monthly debt service as attested to by the last 3 years of accountant prepared financial statements.
Some lenders just provide loans in certain cities or within a 100-mile radius of that city, while others provide loans just in 1 state, and still, others will loan regionally or nationally. Others will make loans both nationally as well as internationally.
Some lenders will not lend to certain industries, such as contractors or healthcare providers, while others specialize in these or other areas.
Some lenders will make loans from $5,000 to $100,000 while others lend from $50,000,000 to $500,000,000. And then there are dozens who might be in the $3,000,000 to $25,000,000 arena and others from $300,000 to $3,000,000 etc.
Some will lend to companies in Chapter 11 and others only to profitable companies. Some will not lend into a Chapter 11 case but can still make a loan to a troubled company with losses and negative net worth.
Some require decent personal credit on the part of the principal others do not.
Some will only provide secured loans against accounts receivable (this would include factoring of accounts receivable), some will just do inventory loans, some equipment loans, and then some will just provide real estate loans.
Within any of these categories, there are many refinements, such as in accounts receivable financing, where one could look at accounts that are billed with 60 or 90-day terms as opposed to accounts billed with 30-day terms or progress billed receivable versus nonprogress billed receivable, etc.
Some lenders will lend against combinations (that vary widely) of collateral types such as accounts receivable and inventory versus equipment and real estate. Some require that 50% or more of the total facility size be against accounts receivable, while others may allow a lower percentage of the facility to be AR driven.
Straight equipment loans can be done as well as straight real estate loans. However, stand-alone inventory loans are very difficult unless accompanied by excellent credit of the borrowing entity.
Purchase order financing enables a new company without collateral to receive funding against orders that they are unable to fulfill due to lack of capital. The PO finance company will provide funding specifically earmarked to pay for labor and material costs associated with the purchase order in question. This funding does not, however, pay for other incidental costs to run the business, such as rent, etc.
Other groups represented by Fisher Enterprises LLC can provide combinations of debt and equity to enable a start-up or troubled company that has insufficient collateral or historical cash flows to qualify for a more conventional secured or unsecured loan, to obtain needed financing.
We can arrange for film financing of $1,000,000 and up.
We can arrange for 100% financing on large construction projects both internationally and domestically of well into the hundreds of millions of dollars where the borrower has to meet certain specific liquidity requirements to be approved.
Additionally, we represent hundreds of equity and venture sources who may provide straight equity if required in order to enable a deal to be completed. This sometimes comes in handy if there is a shortfall from the debt side to complete an acquisition.
In conclusion, a commercial borrower dealing with Fisher Enterprises LLC has a one-stop shopping opportunity where we analyze their financing need and then arrange the best funding available based on the lowest interest rate available, maximum loan amount, and the least onerous collateral requirements based on the particulars of their funding request. We can only provide the best proposal available, given our universe of funding sources, and will always suggest that if the borrower can find a better deal, they should take it.
Debt Versus Equity
In the world of commercial finance, there are only 2 types of funds available, debt or equity. Equity financing involves investors who invest money into a company and, in return, get some percentage ownership of the company. The exact amount of ownership would typically be a function of how much they are investing versus how much the company is worth at the time of investment.
Debt financing, on the other hand, involves a lender who loans money to a company and receives a predetermined interest rate paid by the borrower as well as having the principal (the original amount of the loan) paid back over time.
Investors don’t lend money, and lenders don’t invest money. Investors invest, and lenders lend.
We are primarily involved with debt financing, even though occasionally we may be able to help with equity or some form of a hybrid facility involving guarantees that include a combination of debt and equity.
With straight equity requests, we do work with a group that has a particular interest in investing in companies that have some form of patented technology.
With straight debt financing, there are essentially 2 categories: secured and unsecured.
Secured financing involves loans being made against specific collateral of the borrowing company. The 4 major categories of collateral are accounts receivable (monies due from the borrowers’ commercial customers for services already rendered or goods already sold and delivered against which the advance is generally around 80% of these non-disputed creditworthy accounts less than 90 days old), inventory (lenders typically advance 50% against either the cost of raw and finished goods inventory, excluding work in process or 50% against the liquidation value of same), equipment (most secured lenders will advance anywhere from 50 to 80% against the liquidation value of marketable machinery and equipment), and real estate (most secured lenders will advance anywhere from 50% to 80% against the current value of commercial real estate depending on varying factors).
Today, some of our lenders will also lend against the liquidation value of intangible assets such as intellectual property, patents, and proprietary technology, subject to its ability to be sold in the event of loan default.
When a secured loan is made, the lender will ‘perfect’ their interest in the collateral by filing a UCC-1 lien through the Secretary of State in the state in which the borrower’s collateral is located. This Uniform Commercial Code legal filing enables the lender to have to enjoy specific rights against the collateral and the borrower in the event of default on loan. If the collateral to be borrowed against already has liens against it, the new lender may be able to lend more (a higher advance rate than the previous lender) and pay off the existing lien and substitute their own UCC-1 lien.
Only 1 lender can be in the first position with all the rights that infers. Occasionally on certain types of collateral, a lender will make a loan as a junior lender (taking a second position behind the Senior Secured lender who holds the first lien position). This is sometimes referred to as a mezzanine position or sub-debt (subordinate to the senior or first lien holder. When this occurs, the junior or mezzanine will always get a higher interest rate (often double the cost of senior debt) because, obviously, there is more risk.
In the event of default on the loan when the collateral is liquidated the senior lender is paid first and then the junior or sub-debt lender is paid. If the collateral value comes up short, the junior lender may not get all of the principal, and thus, the higher cost to the borrower is associated with the higher risk.
Besides the lenders’ concern over collateral, which is paramount in any secured loan, next comes their concern over the borrower’s ability to cover the monthly payments. Most conventional lenders will require the borrower to demonstrate through an examination of historical performance the ability to cover the debt service on a new loan. It is not enough to show forward ability, but rather the borrower must demonstrate historical performance. There are a couple of exceptions to this rule, but even there, the lender will have a higher interest rate because of the possible risk that the borrowers’ projections will not actually work out.
There are 3 types of accountant prepared financial statements: 1] compiled which are the least desirable from a lenders standpoint as they are simply a compilation of the numbers given to the accountant by the borrower, 2] reviewed where the accountant performs certain tests to verify the accuracy of the numbers presented, and 3] audited statements where full due diligence is performed verifying the accuracy of the statements.
A financial statement is comprised of 2 parts, the balance sheet and the income statement, also known as a profit and loss statement or P&L statement. The balance sheet lists the company’s assets and liabilities as of a certain date and shows whether the company has a positive or negative net worth (the difference between asset value and offsetting liabilities).
A company can have a positive net worth, meaning if the assets were to be liquidated and the liabilities paid off, there would be money left over and still have what is known as a liquidity problem. That is to say, the company is not liquid (has money problems) because their current assets (cash and accounts receivable, for example) are less than their current liabilities (current bank debt and accounts payable, for example).
The income and expense statement demonstrates whether the company has made or lost money over a period of time up to a certain date. If the expenses are more than the income, there is a loss or vice versa.
Sometimes a company that has a loss can still qualify for a loan if we look at the amount of payments being made, for example, under interest expense, and substitute a less expensive lender who will thus reduce that interest expense. We always must, therefore, carefully examine the P&L statement to determine the borrower’s ability to cover debt service on a new loan.
In summary, we are involved in arranging loans, otherwise known as debt financing, and of the 2 types of debt, we are most often involved with secured loans using the collateral of troubled or developmental stage companies.
When asked whether we can make a particular type of loan for a particular type of company, the subject always needs to be directed back to the basics of collateral and cash flow. Simply put, the borrower either has collateral to secure the loan (again, assets already pledged as collateral can in many cases be refinanced to provide a larger amount of financing) or, if not, historical cash flow or net income performance over a period of at least 2 years to qualify for a cash flow loan.
In some instances, we may be able to provide an unsecured loan based on the principal or a co-guarantor’s personal credit score. This mechanism can work, but only if the borrowing company is in business for a minimum of 1 year.
We can also provide purchase order financing for certain companies, which involves providing money through a purchase order finance company specifically earmarked to pay for labor or material costs associated with a specific purchase order. A purchase order is an order from a customer for goods or services. Let’s say a company has an order from Macy’s for 10,000 dresses but does not have the money to pay for the labor and material to fill the order. The purchase order finance company will provide the needed funds subject to a review of the request and due diligence performed on the borrowing entity.
Borrowers Advantage
Fisher Enterprises LLC represents over 900 commercial funding sources nationwide. We review the particulars of any new funding request by focusing on the borrower’s geographic location, loan size, industry type, collateral mix, historical cash flows, credit profile, etc. in order to identify lenders who can fulfill the specific funding requirements of the borrower. We will then develop and send a written synopsis of the transaction to specific lenders we have identified and further speak with them to select the most likely candidate who can provide the best overall proposal. Our mandate and obligation is to obtain the best financing available for our clients. We earn a closing fee only when the client has accepted the financing we have arranged.
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Other Financing We Can Arrange
Did you know that we provide up to $500,000 in financing to small retailers and restaurants (any company that takes Visa and MasterCard) if they have monthly credit card sales? The amount of financing is tied to the average amount of credit card sales through Visa and MasterCard. This can make a small non-bankable deal work when there is no collateral.
We can also provide for up to $500,000 in unsecured financing for companies of any size that have been in business for a minimum of 1 year and whose principal (or a co-guarantor) has a FICO score of 650 or higher. A FICO score is a measure of a person’s credit as provided through 3 major credit reporting agencies in the United States. These scores show how the individual has paid their bills historically and what kind of credit history they have established.
We can provide for up to 90% financing on small acquisitions (generally up to around $5,000,000) if the buyer has good credit and the company he is buying has decent historical profits. This can be done through an SBA guarantee.
We can provide equipment financing for start-up companies or companies with poor credit. In some cases, the borrower may need real estate (either personal or commercial) against which a 2nd mortgage can be placed.
We have sources that will make loans against publicly traded stock provided that the stock has sufficient value (usually over $2.00 per share) and adequate daily trading volume (usually 25,000 trades per day). Loan to value is typically in the 30 to 50% range and can be arranged even against restricted or 144 stock under certain conditions.
Fisher Enterprises Fees
We earn a success fee at closing of 1% to 5% of the funded amount, determined primarily by the loan size but also depending on the type of transaction and other factors.
The initial work that we perform on any new account is always at our expense and involves an internal review and analysis of the loan request followed by a further review with the specific lender we have selected.
The lender is selected on the basis of the borrowing company’s industry type, geographic location, loan size, credit profile, type and mix of collateral, etc. The lender that we approach with the transaction must express a defined interest in providing a proposal based on the representations that have been made by the borrower before we will issue a terms letter.
We generally require a $3,500 REFUNDABLE retainer, but only after the borrower has received and agreed to proceed with the lender’s specific terms. We work on a non-exclusive basis, and you may choose to accept other financing or pursue other available financing options.
